Tag Archives: real estate

Real Estate Buyers Beware: Supreme Court opinion demonstrates importance for investors and developers to perform due dilligence before closing

14 Dec

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We’ve all heard the old adage: An ounce of prevention is worth a pound of cure. It surprises me how frequently I learn that clients or other savvy investors or businesspeople proceed to purchase real estate without receiving critical advice or performing adequate due diligence.

The Minnesota Supreme Court’s decision in Mattson Ridge, LLC v. Clear Rock Title, LLP, et al. demonstrates why, when purchasing land for investment, development, or even for personal enjoyment, due diligence is so important. The case involves Mattson Ridge, a real estate firm seeking investment opportunities in real estate, and presumably a savvy real estate investor in its own right. The company purchased 64 acres of farmland with the intent to hold it as an investment to sell to another party for future development.

Mattson Ridge read the market perfectly. It closed on its purchase of the property in September 2005 for $1.286 million and by the end of October 2005 had a purchase agreement in place to sell the property for $2.9 million. The sale was scheduled to close in May 2006, but a problem with the legal description of the property prevented the sale because it constituted a defect in the title to the property. In real estate terms, the seller was unable to provide “marketable title” to the property as of the date the buyer was ready, willing and able to close.

Mattson Ridge did take one step to protect itself that a surprising number of parties fail to do, which was to secure title insurance to protect against any title issues that might arise based on defects existing at the time it purchased the property. Unfortunately, that wasn’t enough to completely protect it. The limits under the title insurance policy were set at Mattson Ridge’s purchase price ($1.286 million), rather than at a higher figure that would have covered the full market value of the property (which the evidence suggests was $2.9 million, in light of the purchase agreement it entered into to sell the property).

In its opinion in the Mattson Ridge case, the Supreme Court held that the title to the property was defective, but that Mattson Ridge was not permitted to recover more on its insurance than the policy limits. This means Mattson Ridge is entitled to recovery $1.286 million, plus about $11,000 of out-of-pocket expenses, but it will not recover the profits it lost as a result of the failed closing; more than $1.6 million beyond those policy limits. An ounce of legal advice and assistance with due diligence in this matter would have prevented the need to seek more than a pound of cure -a cure that the buyer was denied because just buying title insurance was not enough.

What’s even more alarming than the $1.6 loss that wasn’t covered by insurance was that the case could have turned out even worse for Mattson Ridge. The Supreme Court declined to decide certain additional issues, which included whether a clause in the insurance policy called a “coinsurance provision” or “coinsurance clause” should reduce the coverage available to Mattson Ridge. A coinsurance provision in an insurance policy states that, if the insured purchases a policy with limits that are more than a certain percentage below the actual extent of potential loss that may arise (often 80 percent), the insured’s recovery may be reduced significantly. This issue did not affect Mattson Ridge because the title insurer did not raise it before the case reached the Supreme Court, but it certainly could have done so and if it had, the buyer could have lost even more money. This represents yet another reason to get advice and assistance when performing the proper due diligence required to make a sound real estate purchase.

Mattson Ridge ultimately was able to remedy the title defect, meaning it could be sold with a title that is now marketable (i.e., without the title defect that prevented its sale under the October 2005 purchase agreement). But the delays and defects that existed because the problem was not discovered prior to its own purchase means Mattson lost its opportunity to obtain a profit of more than $1.6 million in less than a year, and that kind of opportunity may not present itself again.

If you’re considering buying or selling real estate, or have a potential problem with providing or obtaining marketable title, consider taking a heavy dose of prevention and contact an attorney with Thomsen Nybeck. We have been assisting parties with real estate transactions and disputes for 40 years, and we can help you avoid the need for a painful cure that may never come. And, if need be, we can help administer the cure as well.

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Matt Drewes contributed this post.  Matt is a Shareholder with Thomsen Nybeck.  He is the head of the firm’s nine-member Community Association Representation Group and the firm’s Creditors’ Remedies Group. and practices in the areas of business and real estate litigation and transactions, employment law, construction litigation, community association law, debtor/creditor law and insurance. He has been included in the annual list of Minnesota’s Rising Stars for several years, and has been quoted on issues involving construction litigation, community associations and real property issues in the Minneapolis StarTribune, Minnesota Lawyer, Habitat Magazine, Yahoo!Finance.com, Bankrate.com, MSN.com, HOALeader.com, and elsewhere. He can be reached at mdrewes@tn-law.com or by phone at 952.835.7000.

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Minnesota Court of Appeals Holds Buyer Was Earnest About Real Estate Purchase Even Though It Didn’t Pay the Earnest Money Due Under the Purchase Agreement

7 Apr

In the case BOB Acres, LLC v. Schumacher Farms, LLC, decided on April 5, 2011, the Minnesota Court of Appeals held that, as long as the parties to a real estate purchase agreement clearly express the intent to buy and sell real property, the fact that the buyer did not provide the earnest money stated in the contract did not render the contract invalid.  Read it here.  It may at first seem remarkable that the Court of Appeals would hold that a party that did not provide the earnest money specified in the purchase agreement might still be able to enforce the agreement, but there were several factors involved.

The earnest money was a fairly nominal amount ($500 earnest money on a $70,000 contract for the purchase of 25 acres of undeveloped land).  This suggests that the earnest money was not a significant factor in the seller’s decision to sell the property to the buyer, but rather earnest money is provided simply to show the buyer’s good-faith intentions.

The Court also noted that the failure of a party to perform a material provision of the agreement could be a breach that permits the non-breaching party to discontinue performance, but the seller did not raise any objection to buyer’s failure to tender the earnest money until it had already announced that it no longer wished to be bound by the purchase agreement.  This resulted in a waiver by the seller of any right to object to certain breaches of the agreement by buyer, which might have allowed it not to go through with the sale if it hadn’t waived its rights.  The Court of Appeals explained that there is a difference between the issue of contract formation and contract performance.  As far as contract formation is concerned, the Court cited to a treatise on contract law (but apparently found no prior Minnesota case law on point) to hold that a promise is sufficient consideration for a promise.  In other words:  the buyer’s promise to buy the property (presumably for the purchase price stated in the agreement) was sufficient consideration for the seller’s promise to sell the property; the modest earnest money payment was simply incidental to the agreement.

Thomsen Nybeck represents both buyers and sellers, as well as lenders and other parties involved in real estate transactions of all types and sizes.  If you have a question about your next deal, contact one of our attorneys for advice about how to ensure you get the deal you intend.

Matt Drewes contributed to this post.  Matt is a Shareholder with Thomsen Nybeck.  He is the head of the firm’s nine-member Community Association Representation Group and the firm’s Creditors’ Remedies Group. and practices in the areas of business and real estate litigation and transactions, employment law, construction litigation, community association law, debtor/creditor law and insurance.  He has been included in Minneapolis/St. Paul Magazine’s list of Rising Stars for several years, and has been quoted on issues involving construction litigation, community associations and real property issues in the Minneapolis Star Tribune, Minnesota Lawyer, Yahoo!Finance.com, Bankrate.com, and elsewhere.  He can be reached at mdrewes@tn-law.com or by phone at 952.835.7000.

Small Businesses May Catch a Break: Small Business Administration is Funding Commercial Loan Refinancing for Loans Maturing By End of 2012

25 Feb

Struggling small businesses may catch a break based upon a new, temporary program from the U.S. Small Business Administration.  Beginning February 28, 2011, the SBA will begin accepting refinancing applications under this new offering within its 504 loan program.  The program applies to commercial loans that will mature or otherwise have balloon payments due on or before December 31, 2012.

Historically, 504 loans have been used to foster long-term financing opportunities for small businesses by providing them with fixed rates and the flexibility of a low initial equity contribution (as low as 10%).  The businesses could then finance up to 90% of the cost of the proposed project or improvement by receiving an SBA guaranteed loan for up to 40% of the cost of the project.  This portion of the financing is funded by an SBA Certified Development Company and secured by a second mortgage.  The availability of subordinated financing reduces the risk and enhances the prospect of bringing in a private lender, which then funds up to 50% of the project cost and receives a first mortgage to secure its loan.

The new program will tweak the standard 504 loan protocol to suit the goal of refinancing those loans reaching maturity owed by stressed, but viable, businesses.  The borrower may refinance the lesser amount of 90% of the current appraised value of the property, or 100% of the existing loan, as well as certain costs associated with the refinancing.  You can read more about the loan program at the Costar Group’s website on its “Headlines” page, here.

There are signs of revitalization in the world of commercial real estate, and this new SBA program has the potential to further that growth, one small business at a time.  If you’re a business owner looking to expand, modernize, or simply to seek relief from the squeeze of an existing loan coming due, or if you’re a commercial lender, we at Thomsen Nybeck provide prompt, efficient and cost-effective legal services to both commercial lenders and borrowers.

Matt Drewes contributed this post.  Matt is a Shareholder with Thomsen Nybeck.  He is the head of the firm’s nine-member Community Association Representation Group and the firm’s Creditors’ Remedies Group., and practices in the areas of business and real estate litigation and transactions, construction litigation, community association law, debtor/creditor law, insurance and employment.  He has been included in Minneapolis/St. Paul Magazine’s list of Rising Stars for several years, and has been quoted on issues involving construction litigation, community associations and real property issues in the Minneapolis Star Tribune, Minnesota Lawyer, Yahoo!finance.com, Bankrate.com, and elsewhere.  He can be reached at mdrewes@tn-law.com or by phone at 952.835.7000.

Real Estate Agents Beware of Dangers with Social Media

15 Feb

While many real estate agents and brokers utilize email, the Internet and social media as an active part of the business and personal lives every day, be wary of the dangers and risks associated with using any form of online or electronic media in a way that runs afoul of state licensing law in Minnesota.

As you know, Chapter 82 of Minnesota Statutes imposes certain requirements on real estate licensees for disclosing the name of the broker/brokerage company to whom the licensee is licensed (Minn. Stat. Sec. 82.68), identifying oneself as a licensee in all advertising pertaining to the purchase/sale/lease/exchange of property (Minn. Stat. Sec. 82.69) and other similar requirements.  While most agents and brokers are very familiar with how to follow these rules in connection with traditional advertising (signs, brochures, direct mail, newspaper, and company websites) some agents overlook these responsibilities within their personal blogs, personal websites, or when using social media such as LinkedIn, Twitter, Facebook and the like.

As a general rule, consider anything you do as a real estate agent that is in some way connected to marketing yourself as an agent, your company, real estate, or real estate services, as advertising.  Whether you are identifying a new listing or open house on Facebook or telling your followers on Twitter that “now’s the right time to buy investment property”, you should always evaluate whether you are properly complying with state law, brokerage policies, and the Code of Ethics (if you are a REALTOR).

Recently, in a discussion between the Minnesota Association of REALTORS (“MNAR”) and the Department of Commerce Market Assurance Division, the Department of Commerce suggested that they consider all forms of advertising as subject to the restrictions of Chapter 82 (licensing law).   For a thorough explanation, see this recent video update from Linda Modlinski, Senior Vice President of the MNAR.

You will note that the Department has stated they believe that even tweets must identify the broker/brokerage to whom the real estate agent is licensed, if the tweet pertains to real estate or real estate services.   For the uninitiated, a “tweet” is a short 140-character “update” via Twitter.  Obviously, identifying a broker or brokerage company name such as “John Doe’s International Real Estate” in a 140-character post can be challenging, but the Department of Commerce seems undeterred by the practical difficulty this poses.

While state licensing law (Chapter 82) does not identify Twitter, LinkedIn, Facebook or social media anywhere within the statute, but instead speaks of broad and vague issues such as “advertising”, since the Department of Commerce is the ultimate licensing and regulatory body in the State of Minnesota, it is important to carefully consider and be mindful of how they interpret Chapter 82.  Failure to adhere to or follow the law, as they interpret it, can be a risk proposition for real estate licensees.

For more information about this, or to create brokerage policies of have a risk audit of various agent marketing efforts, contact an attorney familiar with real estate brokerage and Department of Commerce regulatory actions.

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This blog entry is written by Brad Boyd, a Shareholder at Thomsen Nybeck. Brad is the chair of the firm’s Transactional Group, and his practice focuses primarily in Real Estate, Real Estate Brokerage, Business and Corporate law, and Wind Energy Law.  Brad provides legal advice, guidance, and representation related to risk management in a wide variety of real estate and business law matters.  He is counsel to the Minnesota Association of Realtors, many individual Realtors and brokerages, business clients and individuals.

Prominent Real Estate Website to Feature Real Estate Agent Ratings

2 Dec

The website Zillow: www.zillow.com has been increasing in popularity and prominence over the last few years.  The website is perhaps best known for providing purported home values based on information that they compile.  While they have drawn criticism regarding how accurate this valuation information may be in various markets, they are now expanding their service offerings. Zillow is now going to feature ratings of real estate agents as part of its site.  More information as to the process by which they intend to do that can be found here.  This appears to be part of a trend of rating professionals, as lawyers have seen a similar idea played out with the website Avvo.  As the dominance of the Internet as an information medium continues to grow, communication amongst consumers regarding products and services will likely continue to increase, including now with people rating their real estate agents.  Real estate agents should be aware that this exists in order to ensure that there are no false or misleading ratings or comments about their services that need to be addressed.  If you are interested in trying to use Zillow, that information can be found here.

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This blog entry is written by Chris Renz and Brad Boyd, shareholders at Thomsen Nybeck. Chris practices in the litigation area of the firm with primary focus on wind energy-related lease litigation, real estate litigation, employment litigation, townhome and condominium law, and criminal law, particularly as the prosecutor for the Metropolitan Airports Commission.  Brad is the chair of the firm’s Transactional Group, and his practice focuses primarily in Real Estate, Real Estate Brokerage, Business and Corporate law, and Wind Energy Law.  Brad provides legal advice, guidance, and representation related to risk management in a wide variety of real estate and business law matters.

Investigators auditing loan docs force buy-backs

23 Nov

There are a growing number of businesses that are focusing tremendous efforts on finding misrepresentations, fraud, or egregious mistakes in loan files that resulted in bad mortgages, ultimately leading to high levels of borrower default and foreclosure.  Some of these entities have proven successful on behalf of loan investors (such as those who hold mortgage-backed securities, a familiar dinner table term) in forcing the banks who originated such loans to buy them back.

In a Wall Street Journal Online article posted yesterday (View full article here: http://online.wsj.com/article/SB10001424052748703559504575631110278708250.html?mod=rss_whats_news_us_business), some extraordinary stories are revealed.  Unfortunately high levels of fraud which would have seemed almost inconceivable in the mortgage business ten years ago, were obviously sufficiently common in recent years that the trend of such “extreme” examples became common enough to derail the bedrock business of mortgage and real estate.  The Wall Street Journal article cites some of the scenarios where “no doc” loans where borrowers did not have to verify their income through tax records or financial statements led to catastrophe.

Here are a couple “interesting” stories quoted from the WSJ article.  “One borrower whose loan was scrutinized claimed to be a shoe salesman earning $35,000 a month. A regional sales manager who cited earnings of $250,000 a year actually made $47,000 as a clerk for the same company.” (click here to link to full WSJ article).

Fortunately, some of the banks that engaged in such utter lack of judgment are being held accountable for some of their actions (buying back the loans), but with the current high rates of foreclosure, borrowers struggling to repay their existing debts (even in “traditional” loans) and lending severely hamstrung, the tales of this crisis have not yet been fully written.

If you’re interested in this issue, follow my updates on Twitter @BrokerageAtty.

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This blog entry is written by Brad Boyd, a Shareholder at Thomsen Nybeck. Brad is the chair of the firm’s Transactional Group, and his practice focuses primarily in Real Estate, Real Estate Brokerage, Business and Corporate law, and Wind Energy Law.  Brad provides legal advice, guidance, and representation related to risk management in a wide variety of real estate and business law matters.  He is counsel to the Minnesota Association of Realtors, many individual Realtors and brokerages, business clients and individuals.

Old Republic won’t underwrite Chase or GMAC REO property

7 Oct

Well this news may have a ripple effect.  Apparently problems with errors or mistakes in the foreclosure process may have lead to a decision by Old Republic Title (a large title insurance company) not to underwrite title insurance for the purchase of REO (bank-owned) property owned/foreclosed by J.P. Morgan Chase or GMAC Mortgage (now owned by Ally Bank).

Although this situation could resolve in the future, apparently Old Republic has issued its own internal edict that until the objectionable issues have been resolved, they won’t underwrite title policies for Chase or GMAC properties.  Since most home purchasers need financing from a lender, and since lenders typically require a title insurance policy with coverage for the lender, when a major underwriter like Old Republic stops underwriting Chase or GMAC properties, there may be a dramatic chilling effect, and it might deter other insurers from underwriting those deals as well.

For the sake of the flow and movement of the residential real estate market and to avoid further price deterioration and market stagnation, let’s hope these issues can be corrected in short order.  The problem appears to be significant enough for GMAC and Chase to temporarily halt foreclosures in 23 states until issues related to the foreclosure process are resolved.

You can find articles identifying more details about this issue at the New York Times, here: http://www.nytimes.com/2010/10/03/business/economy/03foreclose.html?_r=2&scp=1&sq=old%20republic%20national%20title&st=cse, and at CBS Moneywatch, here: http://moneywatch.bnet.com/saving-money/blog/home-equity/old-republic-title-wont-insure-chase-foreclosures/2868/.

This blog entry is written by Brad Boyd, a Shareholder at Thomsen Nybeck. Brad is the chair of the firm’s Transactional Group, and his practice focuses primarily in Real Estate, Real Estate Brokerage, Business and Corporate law, and Wind Energy Law.  Brad provides legal advice, guidance, and representation related to risk management in a wide variety of real estate and business law matters.  He is counsel to the Minnesota Association of Realtors, many individual Realtors and brokerages, business clients and individuals.

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